# How to calculate solar panel payback period (ROI)

The financial benefits of going solar are now well documented. Solar panel systems actually function as investments with strong rates of return, and homeowners generating solar electricity can avoid paying increased utility rates by eliminating their electricity bills. Multiple studies show that installing solar panels on your home can even increase your property’s value! If you’re reviewing multiple quotes, there are plenty of metrics that can help you make a decision about which solar option is best for you, but most solar shoppers rely on one metric in particular: the solar panel payback period or break-even point.

## Key takeaways: solar payback periods

• Your “solar payback period” is the time it takes to make back your initial solar investment.
• For most solar shoppers on EnergySage, you’ll break even in about 8.7 years.
• You calculate your solar payback period by dividing the combined costs for your system by your annual benefits.
• Start comparing solar quotes on the EnergySage Marketplace for maximum savings.

## What’s the average payback period for solar panels?

The solar panel payback period is a calculation that estimates how long it will take for you to “break even” on your solar energy investment. Increased utility electricity rates and lower equipment costs are making it easier and less expensive to for homeowners to own, rather than lease, their solar panel systems. Comparing the payback period of various quotes from solar installers is an easy way to comprehend the financial merits of each option, and identify the point in time at which your solar investment will start to earn you money.

The average solar payback period on EnergySage is just about 8.7 years. If your cost of installing solar is \$20,000 and your system is going to save you \$2,300 a year on foregone energy bills, your solar panel payback or “break-even point” will be 8.7 years (\$20,000/\$2,300 = 8.7).

## Factors impacting your payback period

Both the combined costs and annual benefits of going solar will impact your solar payback period. These include:

### Gross cost of solar panel system

The gross cost of installing solar on your home is dependent on the size of the system you select and the equipment that makes up that system.

### Value of up-front financial incentives

Tax breaks and rebates can dramatically reduce the cost of going solar. The federal investment tax credit (ITC) allows you to deduct 26 percent of the cost of your system from your taxes, and additional state and local financial incentives may also be available in your area.

### Average monthly electricity use

The amount of electricity that you consume monthly is an indicator of both the size of system you need and the amount of electricity that you can offset each month with solar. The higher your electricity bills are, the shorter your estimated payback period will be, as you can reduce or eliminate this bill as soon as your panels are operational.

### Estimated electricity generation

While solar installers will try to provide you with a system that matches your electricity consumption, practical constraints like the size of your roof and seasonal weather variation may impact the amount of electricity that you can produce on-site.

In some areas of the country, you may be able to earn additional incentives in the form of solar renewable energy certificates (SRECs) or other utility programs that give you a per kilowatt-hour credit for the electricity that your solar panels generate. Depending on the size of your solar energy system, these can represent a significant monetary benefit.

## How is the solar panel payback period calculated?

To calculate your solar payback period, you’ll need to take the following steps:

1. Determine combined costs. Subtract the value of up-front incentives and rebates from the gross cost of your solar panel system.
2. Determine annual benefits. Sum up your annual financial benefits, including avoided electricity costs and any additional incentives.
3. Divide your combined costs by your annual financial benefits. The result will be the number of years it will take for you to achieve payback. Every month of savings after that point in time should be counted as a financial gain!

## Calculating your solar payback period: a step-by-step guide

### Combined costs

First, we’ll determine your combined costs. you’ll need to know the gross cost of your solar panel system. Let’s assume the gross cost of your solar system is \$20,000. Now, we need to understand the upfront incentives available to you, including the solar tax credit and local rebates or incentives. Given that the ITC is currently set at 26 percent, with a \$20,000 solar system, you’ll be eligible for \$5,200. Now, let’s also assume you can take advantage of an additional \$1,000 in local rebates – this brings your upfront incentives to \$6,200 and your combined costs to just \$13,800.

Gross cost (\$20,000) – upfront incentives (\$6,200) = combined costs (\$13,800)

### Annual benefits

To calculate your annual benefits, you’ll need to know how much you’re saving each year on electricity costs. Let’s assume your monthly electricity bill is about \$100 – annually, that amounts to \$1,200 in avoided electricity costs assuming your system covers 100% of your electricity needs. You’ll also need to know how much you’ll receive from other incentives each year, like SRECs. In our example, we’ll assume you’re earning \$500 annually from selling SRECs – this means you’ll receive \$1,700 in annual benefits.

Avoided annual electricity costs (\$1,200) – annual incentives (\$500) = annual benefits (\$1,700)

### Final calculation

Now, to calculate your solar payback period, you just need to divide your combined costs by your annual benefits!

Combined costs (\$13,800) / annual benefits (\$1,700) = solar payback period (8.1 years)

In our example, your payback period would be 8.1 years – pretty close to the 8.7 year average on EnergySage!

Does solar really pay off?

Yes, solar really does pay off! The average EnergySage shopper sees a solar payback period of 8.7 years – so given that most solar systems will last at least 25-30 years, you can definitely expect your solar system to be worth the investment.

Will I still have an electricity bill with solar panels?

While you may not owe anything on your electricity bill, you’ll still receive an electricity bill from your utility company as long as you’re still connected to the grid.

How much does solar save you each month?

According to the U.S. Energy Information Administration (EIA), the average electricity consumption of a U.S. household is 893 kWh. Data from the EIA show that the average cost of electricity in November 2021 was 14.12 cents in the U.S. Thus, assuming that your system covers 100% of your electricity needs, you’ll save \$126 each month on avoided electricity costs, on average.

## Compare solar quotes on EnergySage

For any homeowner in the early stage of shopping for solar that would just like a ballpark estimate for an installation, try our Solar Calculator that offers upfront cost and long-term savings estimates based on your location and roof type. For those looking to get quotes from local contractors today, check out our quote comparison platform.

This post originally appeared on Mother Earth News.

cost/savings content

## 27 thoughts on “How to calculate solar panel payback period (ROI)”

1. Mark Menghini

References above to payback calculations are conservative. They do not include time value of money/discount rate. . Easy to figure but not the most accurate.

2. Travis

Why does ROI matter? If there is 1:1 net metering in the area, isn’t the question ANY RETURN or NO RETURN for your light budget? Do we not all agree that eventually batteries will be financially and technologically viable, and that will be the end of oil and has as anything other than an emergency back-up? And that will probably be well within the lifespan of these tier-1 systems?

It seems like a straw-man. Nobody argues about whether renting or buying a home is the “better option.” Do people normally calculate their ROI on their mortgage payments vs. rent? I live in an apartment, but I didn’t think so lol I thought the consensus was we BUY EVERYTHING WE CAN and RENT WHEN WE HAVE TO because it’s logical. (except boats planes and loose ladies according to my grandpa lol)

In 10 years where do you want to be, looking for the best solar installers in your area, or in the beginning stages of forgetting purchasing electricity as a product was ever even a thing?

1. Steve Corcoran

You seem to be under the impression that the only thing our society uses petroleum for is to operate power plants. 80% of the possessions you own are created from petroleum using chemistry (including most of the components that make up a solar energy system). While I agree that solar is definitely part of the solution to our world’s future energy supply, the better batteries today rely on lithium extraction, which is not only many orders more damaging to our environment than recovery of petroleum reserves, but the current processes to create lithium ion batteries require a much greater energy input than can ever be made up for during the life of the battery.

1. Zemar

Steve, I’m interested in learning more. What do you mean when you say a lithium ion battery requires more energy input than can ever be made up during the life of the battery? A quick google search shows an estimate of 50-65kwh for each kwh of the lithium battery. So for my EV, which has about a 30khw battery, 1,950kwh (on the high end) of energy went into making the battery. On my vehicle, 1,950kwh will get me about 6000miles, which is less than 1 year of driving. Of course, there are other considerations, but back of the envelope calculations shows that an EV driver with an lithion-ion battery would easily make up for the energy that went into making the battery within a 1 year or so. What am I missing?

3. Paul

I would fully support the comments above. Using the calculator on this site, it indicates a 13 year payback on a nett \$47,000 cost for my property. I actually installed solar 4 years ago and the returns are well below the figure calculated by the company selling the system.

To date the system has reduced the power consumption by around 35% to 40 %.as against the 60% which was indicated in the design and offer. Part of the reason was a failure to take into account a couple of trees that interfere with the operation of the east facing panels in the morning, but that does not account for all the underperformance.

The annual savings provided by the tool on this energysave site is \$2,700 per year, whereas in fact it is only \$1,400. per year over the four year period since we installed the system.

This provides a repayment period of around 33 years, not taking into account the opportunity value of the up front payment as Troy mentions above.

Solar is not a good investment by virtue of the vendor companies siphoning off the grants available and overcharging for the equipment and installation.

1. Ricardo Stange

Perhaps the shading of the trees in interfering with the output of the others panels as well. This is a known issue if you are using string inverters.

4. Troy

What’s misleading about these calculators is that they totally disregard the opportunity cost associated with the upfront capital investment! That \$20,000 upfront cost could alternatively be invested and earning a annual compounded return. At a reasonably modest 7% ROI on the capital with a 15% annual tax on the long-term capital gains and assuming a historical average 3% annual increase in electricity costs (and thus annual savings), one’s really looking at a 13 year break-even, given the quoted baseline \$2700/month annual benefit. Not even close to 7.4 years.

1. Steven Scott

Exactly right, Troy!! Energysage is a good resource for information about solar but it seems to be more of a cheerleader for solar rather than an impartial observer.

2. Andrew

Your point is good to consider but your point also makes a similarly false assumption. If you don’t go solar and instead invest that money, you won’t be making nearly the return you claim if you use those funds to pay your monthly electric bills. You’re not investing that 20k untouched for years and years. You’re investment starts at 20k and as soon as one month in, it starts to drop and eventually reaches zero.

3. Arthur

Yes, opportunity cost may be missing but so is the property value added by having solar. Homes with solar sell for ~4% more than those without and ~20% faster… A little bit of selection bias there, but this isn’t all sunk cost we’re talking about here.

5. Michael

So with current cost for solar – gov rebate what is the aver cost per kWh for Life of the system which would include maintaining system. I figure it’s about .16-.18 which includes possible new inverter half way through life of panels and degradation of panels output, finance rate for 12 yrs cost of the utility meter.

6. david schechter

Good points however most panels and inverters all come with 25 and 12 year warranties so I think the differentiation is workmanship warranty . The cost to repair roof structure damage or worse yet total roof replacement for shoddy install can be in the thousands of dollars .

7. Michael G

What about maintenance? We clean panels and output goes up around 20+% after cleaning. Most people don’t maintain their panels so their benefit is reduced over time. That’s a loss. Add in regular cleaning to keep panels producing optimally and that’s an ongoing cost. The numbers in this article are a fantasy. Pigeons like to nest under panels. Factor in \$1500 to clean and screen. Where are you numbers after that?